Moreover, unlike the facts in McCall where the court examined insider trading
allegations within a time period of over two years or from January 1995 to April 1997, here
plaintiffs’ allegations focus on a ten day time period during which the director defendants sold
their Westell stock. Specifically, plaintiffs allege Nelson unloaded 40% of his holdings between
July 24 and August 1, 2000; Kirby, who never sold Westell stock before, unloaded 20% of his
holdings on July 24; and Reynolds unloaded 30% of his holdings on July 25. Although in
smaller amounts, still coincident in timing, Simon sold 5,000 shares, and Penny sold 4,098 shares
on July 25, realizing profits of $150,000 and $122,940, respectively.’ As to Simon, a director
and the Assistant Secretary and Assistant Treasurer, and Penny, an outside director, plaintiffs do
not allege that Simon or Penny unloaded large amounts of their personal holdings of Westell
stock or that prior to that time period, they never traded their Westell stock. However, Delaware
law provides that “where all the defendant directors allegedly engaged in insider trading within a
matter of weeks based upon the same inside information, . . . the insider trading claims should be
viewed collectively.” Strougo v. Carroll, No. 8040, 1991 WL 9978, at *4, 17 Del. J. Corp. L.
352, 362 (Del. Ch. Jan. 29, 1991) (unpublished); see also In re Gen. Instrument Corp. Sec. Litig.,
23 F. Supp. 2d 867, 874 (N.D. Ill. 1998), quoting Strougo. As such, plaintiffs have adequately
pled that five of Westell’s eight directors would face a substantial likelihood of personal liability
that would prevent them from exercising impartiality in considering a shareholder demand. See

Strougo, 1991 WL 9978, at *4, 17 Del. J. Corp. L. at 362 (“Common sense suggests that, at a

Plaintiffs include Zionts’ sales of stock during that ten day period when arguing that the director
defendants were interested. However, when plaintiffs filed their derivative complaint in August 2001, Zionts had not
been a director for approximately five months or since March 2001. Rales, 634 A.2d at 934 (stating demand futility
pled “as of the time the complaint is filed”); (see also Compl. J 11.)

13


information through their positions as directors and/or senior officers of Westell and their
receipts of reports, attendance at meetings, and access to all of Westell’s books, records and other
proprietary information. (/d. { 12.) Defendants realized that when this information became
public, it would seriously affect Westell’s revenues, earnings and price of common stock. (id. J
16.) Defendants thus embarked on a massive hype campaign to inflate the price of Westell’s
stock so that they could unload as much stock as possible before the news concerning SBC’s
cutbacks in purchases of Westell’s DSL modems became public. (/d.)

For example, Westell announced on June 28, 2000 that it entered into a new partnership
(although it did not specify with whom or what company) to meet the “expanding demand” for
its products because it was “running at full capacity in its existing Aurora facility.” (Ud. 17.)
On June 29, 2000, Barry Sine (“Sine”), an analyst at Kaufman Brothers, reported that he spoke
with Westell and that “[bJased on the massive demand for DSL services by Westell’s customers,”
he expected Westell to report strong results for the June quarter. (/d. J 18.) He further reported
“we believe SBC Communications will again be the company’s largest account, despite the fact
that it is still an unannounced customer.” Sine then issued a “Strong Buy” rating on Westell with
a price target of $65 a share. (/d. {{] 17-18.)

On July 7, 2000, Bellace issued a “Buy” rating on Westell with a $50 price target. (Id. J
19.) As a result of his consultations with officers at Westell, he projected that Westell’s 2001
revenues (for the period April 1, 2000 to March 31, 2001) would be $400 to $425 million. As
with Sine, Bellace did not know about SBC’s cutbacks. On the same day Bellace issued his Buy

report, Westell stock increased by 25%, ending at $19 a share.


securities class action that had not yet proceeded to final judgment or settlement under a claim
for corporate waste). Thus, this claim for damages is premature and must be dismissed. See In
re Symbol, 762 F. Supp. at 516-17.

Moreover, with respect to plaintiffs’ claim for damages based on Westell’s “integrity in
the market” and “loss of goodwill” (Compl. ff 4, 27, 28, 41), this claim is conclusional and
insufficient because plaintiffs do not apprise defendants of the basis and extent of the alleged
damages. In re United Telecomm., 1993 WL 100202, at *2; accord In re Symbol, 762 F. Supp. at
517 (rejecting an injury in the marketplace theory and stating “damages must be shown to
directly flow from the wrongful acts of defendants, and not the mere commencement of legal
proceedings against the corporation.”). Therefore, this claim is dismissed.*

Accordingly, defendants’ motion to dismiss Count II for failure to plead a legally
cognizable theory of damages is granted in so far as plaintiffs plead damages based on Westell’s

defending the pending federal securities action (Compl. {ff 4, 27, 41) and Westell’s loss of

integrity in the market (id. {1 28, 41) and goodwill (id. 41).

SHowever, where plaintiffs allege that defendants are liable to Westell under Count 1 (Compl. 42), a
claim for damages based on that allegation is legally cognizable since Delaware law “has long recognized the
availability of a stockholder derivative action to recover profits obtained by corporate insiders through breach of
their fiduciary duties.” Jn re Symbol, 762 F. Supp. at 517. Therefore, that claim for damages under Count II must
remain. .

17


Rales v. Blasband, 634 A.2d 927, 933-34 (Del. 1993).? “To establish a reasonable doubt,
plaintiffs are not required to plead facts that would be sufficient to support a judicial finding of
demand futility . . . [nJor must plaintiffs demonstrate a reasonable probability of success on the
merits.” McCall v. Scott, 239 F.3d 808, 816 (6" Cir. 2001), citing Grobow v. Perot, 539 A.2d
180, 186 (Del. 1988) and Rales, 634 A.2d at 934,

“[W]hether plaintiffs have alleged facts sufficient to create a reasonable doubt concerning
the disinterestedness and independence of a majority of the Board must be determined from the
accumulation of all the facts taken together.” McCall, 239 at 816-17. A director is interested
when “he will receive a personal financial benefit from a transaction that is not equally shared by
the stockholders, or when a corporate decision will have a ‘materially detrimental impact’ on a
director but not the corporation or its stockholders.” Jd. at 825, quoting Rales, 634 A.2d at 936.
However, “the ‘mere threat’ of personal liability in the derivative action does not render a
director interested[.]” Seminaris v. Landa, 662 A.2d 1350, 1354 (Del. Ch. 1995). Rather,
“reasonable doubt as to the disinterestedness of a director is created when the particularized
allegations in the complaint present ‘a substantial likelihood’ of liability on the part of a
director.” McCall, 239 F.3d at 825, citing Rales, 634 A.2d at 936. Moreover, “[e]ven if a
director has no personal interest in a decision, his discretion must also be free from the influence
of other interested persons.” Seminaris, 662 A.2d at 1354. A director is independent if he can

make a decision “based on the corporate merits of the subject before the board rather than

Because plaintiffs assert that they are not challenging a business decision by Westell’s board of directors,
the demand futility test in Rales, 622 A.2d at 934, and not Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), applies
here. See In re Abbott, 293 F.3d at 387, 388 n.3.


From July 21 to August 1, 2000, defendants sold about 450,000 shares of Westell stock
total, reaping proceeds of almost $11.5 million. (Id. 24.) Specifically, between July 21 and
August 1, 2000, Zionts, who had never sold any Westell stock before this time, sold 231,440
shares at between $28 and $29 a share or approximately 65% of his holdings, reaping proceeds of
$5,557,730; on July 21, 2000, Nelson sold 100,000 shares at $27.38 a share or approximately
40% of his holdings, reaping proceeds of $2,738,000; between July 24 and August 1, 2000,
Kirby, who had never sold any Westell stock before this time, sold 80,000 shares at between
$22.79 and $29.09 a share or approximately 20% of his holdings, reaping proceeds of
$2,057,700; on July 24, 2000, Reynolds sold 27,200 shares at $28.46 a share or approximately
30% of his holdings, reaping proceeds of $774,122; on July 25, 2000, Penny sold 4,098 shares at
$30 a share, reaping proceeds of $122,940; and on July 25, 2000, Simon sold 5,000 shares at $30
a share, reaping proceeds of $150,000. (Jd. | 10(a)-(f).)

Only days after defendants unloaded their Westell stock, the real story about SBC’s
cutbacks emerged. In early August, Bellace reported that SBC had, beginning in June 2000,
changed its purchasing requirements for DSL modems, and thus would be ordering fewer
modems in the future from Westell. (/d. 25.) The stock price tumbled right back to the mid-to-
high teens immediately upon release of the news (which was admittedly known by Westell
management six to eight weeks earlier). (Jd.) As was later reported by Pluckhahn, it was not
merely a decline in usage by SBC that had caused Westell’s problems but also that SBC had
begun purchasing more from Westell’s main competitor, Efficient Networks. (d.)

On October 18, 2000, Westell admitted that the decline in orders from SBC would have a

material negative effect on its revenues and earnings. Westell reported second quarter DSL


On July 18, 2000, Westell issued what one analyst called a “blockbuster announcement.”
(id. | 20.) Westell announced that it had established a supplier relationship with SBC. Analysts
following Westell responded with uniformly positive reports. On July 20, 2000, an analyst at
Kaufman Brothers issued a report reiterating its “Strong Buy” on Westell and $65 price target.
The report stated:

Westell Technologies followed yesterday’s blockbuster announcement that it had

won SBC Communications (SBC $43 5/8) as a customer with second quarter

results that were well above our estimate, consensus, whisper and even telepathic

expectations. ... The key driver of revenue was the company’s DSL customer

premises equipment (CPE) business, which posted $61.9 million in revenue, 40%
higher than our estimate and up 282% sequentially.

**
We are today more bullish on shares of Westell Technologies than ever.
(d. J 20-22.)
Similarly, on July 21, 2000 another analyst at Chase Hambrecht & Quist Inc. issued a
report rating Westell a “Buy” with a $70 price target. The report stated that:
Growth was once again driven by rapid acceleration in the Company’s DSL
businesses; [w]e believe that the Company maintains numerous opportunities for

additional upside as it continues to capitalize upon its strong relationships with its

strategic partners ....
KK

It appears that Westell’s DSL businesses continue to fire on all cylinders.
(Ud. 23.) Asa result of Westell’s announcement, the market’s reaction was swift and dramatic.
(Ud. 421.) The price of Westell’s common stock rose up to $28.50 a share by July 21, 2000 and

closed at $30 a share on July 25, 2000.


ORDER
Wherefore, and for the reasons stated above, defendants’ motion to dismiss plaintiffs’

verified derivative complaint [#26-1] is granted in part and denied in part.

ENTER: dgar, hth

AN HUMPHREY LEFKOW
United States District Judge

Dated: July 22, 2002

18


judgment and determine whether litigation is in the best interest of the corporation.” In re
Abbott, 293 F.3d at 386.

Federal Rule of Civil Procedure 23.1 requires the derivative complaint to “allege with
particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from
the directors . . . and the reasons for the plaintiff’s failure to obtain the action or for not making
the effort.” Because the requirement of a shareholder plaintiff to make a demand on the board of
directors “is more than a pleading requirement, it is a substantive right of the shareholder and the
directors[.]... [T]he law of the state of incorporation . . . controls these substantive rights and
governs what excuses are adequate for failure to make a demand.” Jn re Abbott, 293 F.3d at 387.
Delaware is Westell’s state of incorporation and the parties agree that Delaware law applies here.

Plaintiffs concede that they made no demand on Westell’s board of directors prior to
filing their complaint. However, they aver that a demand would have been futile because five of
the eight directors on Westell’s board personally benefitted from conduct alleged in their
complaint and, therefore, were interested and could not have impartially responded to a demand.
(Compl. 11, 44.) In determining whether a demand would be futile, the court must consider
whether

... the particularized factual allegations of a derivative stockholder complaint

create a reasonable doubt that, as of the time the complaint is filed, the board of

directors could have properly exercised its independent and disinterested business

judgment in responding to a demand. If the derivative plaintiff satisfies this
burden, then demand will be excused as futile.


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

Ni f Assigned Jud; Sitting Judge if Oth
mor Magistrate Judge Joan H, Lefkow than Assigned Judge
CASE NUMBER 01 C 2826 DATE 7/23/2002
CASE Dollens, et al. vs. Zionts, et al.
TITLE

MOTION: of the motion being presented.]

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

DOCKET ENTRY:

(l) Qa Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

(3) ia Answer brief to motion due___. Reply to answer briefdue___.

(4) Qo Ruling/Hearingon___—_—ssetfor___—_—at

(5) O Status hearing[held/continued to] (set for/re-set for]on__setfor__at

(6) oO Pretrial conference[held/continued to] [set for/re-set for]on___—sssetfor_ at,
(7) QO Trial[set for/re-set for]on__at

(8) oO [Bench/Jury trial] [Hearing] held/continued toa

(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OOFRCP4(m) General Rule21 OFRCP41(a)\(1) © FRCP41(a)(2).

plaintiffs’ verified derivative complaint [26-1] is granted in part and denied in part.

(11) @ [For further detail see order attached to the original minute order.]

qo) {Other docket entry] | Enter Memorandum Opinion and Order. Defendants’ motion to dismiss

No notices required, advised in open court.
10

No notices required.

Notified counsel by telephone. Ge Beksted

Mail AO 450 form.

Docketing to mail notices. Lys 39
BU

Copy to judge/magistrate judge.

Zi Had Co Wil 20
courtroom date mulled notice

Mo samy ot U3-03 U4 ve

initials

Date/time received in

mailing deputy initials

central Cles

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compensation in stock, they should be expected to trade those securities in the normal course of
events.” Jd. at 825. As such, it concluded “it must be shown that each sale by each individual
defendant was entered into and completed on the basis of, and because of, adverse material non-
public information. ... Further, fraudulent intent may be inferred from the timing and quantities
of the trades.” Jd. (internal citations and quotations omitted).

In applying these standards, the McCall court looked at the plaintiffs’ factual allegations
of insider trading over a two year period or from January 1995 to April 1997 and found that the
plaintiffs only generally averred that some of the directors sold millions of dollars of the
company’s stock “at prices artificially inflated by the undisclosed fraudulent practices authorized
or permitted by the Board.” Jd. Moreover, the court determined that some of these director
defendants maintained their substantial holdings of company stock during this time period and
that the plaintiffs also failed to plead, regarding certain directors, the “relative holdings or the
timing of the transfers.” Id. The court then concluded “[a]lthough relying upon the ‘red flags’ to
allege that the directors knew or recklessly disregarded [the company’s] improper policies and
practices, plaintiffs failed to connect the timing of any of the stock transactions to those
warnings.” Id. at 825-26.

In In re Oxford Health Plans, Inc., 192 F.R.D. at 115-16, the court held that the plaintiffs
properly pled demand futility where the director defendants knew of management’s
misrepresentations to the financial markets concerning the company’s financial crisis but feared
that taking action would harm the company’s market price, result in increased regulatory
oversight, slow the growth of the company, and jeopardize their personal and financial interests

and their personal ties to the company’s CEO. It further determined that any independence or

i


extraneous considerations or influences.” Rales, 662 A.2d at 936, quoting Aronson v. Lewis, 473
A.2d 805, 816 (Del. 1984).

Defendants assert that the complaint fails to plead a substantial likelihood of liability on
the part of the director defendants (Nelson, Kirby, Reynolds, Penny and Simon) because it does
not attribute any of the alleged misrepresentations or knowledge of the SBC problems to these
defendants. Defendants further contend the complaint alleges only that defendants are directors
(with the exception of Nelson who also is CEO and Simon who also is the Assistant Secretary
and Assistant Treasurer) and sold Westell stock, and rely primarily on McCall, 239 F.3d at 825.*
Plaintiffs assert the director defendants were clearly interested because they knew public
disclosure of the decline in orders by SBC would have a material effect on Westell’s stock price
and sold their stock from July 21 to August 1, 2000. Plaintiffs rely on Jn re Oxford Health Plans,
Inc., 192 F.R.D. 111, 115-16 (S.D.N.Y. Mar. 9, 2000) and In re Cooper Companies, Inc.
Shareholders Derivative Litig., No. 12584, 2000 WL 1664167, at *6-7 (Oct. 31, 2000).

In McCall, the court held that the plaintiffs’ derivative complaint did not adequately plead
demand futility under Delaware law based on insider trading allegations because it did not link
the directors’ alleged acquisition of non-public material information with their stock sales.

239 F.3d at 825-26. The court recognized that “when directors and officers own stock or receive

‘Moreover, defendants argue the complaint fails to plead that there is a substantial likelihood of liability on
the part of the director defendants because it does not allege they engaged in conduct more egregious than mere or
gross negligence and also point to Westell’s Charter, which precludes directors’ liability for actions based on
negligence or gross negligence under Section 102(b)(7) of the Delaware Code, 8 Del. Laws 102(b)(7) (2000).
Plaintiffs, however, apparently do not intend to pursue a claim for breach of duty of care (Resp. at p. 8) although
they aver in their derivative complaint that “[t]he Director Defendants’ sales of Westell stock, while in possession
and control of this material, non-public information, was a breach of their fiduciary duties of loyalty, good faith, and
due care.” (Compl. 137) (emphasis added). Thus, the court does not consider whether plaintiffs adequately plead
demand futility based on defendants’ alleged breach of ‘duty of care or other negligent conduct. See McCall v. Scott,
239 F.3d 808, reh'g granted, 250 F.3d 997 (6 Cir. 2001), addressing the demand futility exception with respect to
directors’ liability based on a breach of duty of care claim.

10


revenues of $49.5 million, many millions lower than what it had assured analysts two months
earlier. As a result of this announcement, Westell’s stock price dropped to $5.94 a share on
October 19, 2000.

Since the release of the various negative reports and with Westell’s poor growth
prospects, several Westell shareholders commenced a class action on or about October 27, 2000
against Westell (and others), alleging that Westell’s public disseminations were materially false
and misleading in violation of federal securities laws.? Further, on or about August 2, 2001,
plaintiffs filed the instant derivative action against nominal defendant Westell and the six named
defendants, alleging various breaches of fiduciary duties for insider trading and misappropriation
of information under Count I and for exposing Westell to significant liability and damages under
Count I.

DISCUSSION
A. Dismissal for failure to plead demand futility

In a derivative action, a shareholder plaintiff seeks to enforce a right that belongs to the
corporation. See Kamen v. Kemper Fin. Servs. Inc., 500 U.S. 90, 95 (1991). “[Gliven ‘the basic
principle of corporate governance that the decisions of a corporation—including the decision to
initiate litigation-should be made by the board of directors or the majority of shareholders,’ most
jurisdictions require a pre-suit demand be made of the corporation’s board of directors.” In re
Abbott Laboratories Derivative Shareholders Litig., 293 F.3d 378, 386 (7" Cir. 2002), quoting

Kamen, 500 U.S. at 95. A pre-suit demand “allows the directors to exercise their business

2 There is also the federal securities class action In re Westell Te ‘echnologies, Inc. Sec. Litig., No. 00 C 6735,
which is related to the instant derivative action, (See Order, Sept. 4, 2001).

7


in detail. This means the who, what, when, where, and how: the first paragraph of any
newspaper story.”).
FACTS

Plaintiffs’ consolidated derivative complaint alleges the following facts, which are taken
as true for purposes of this motion: Nominal defendant Westell, a Delaware corporation
headquartered in Aurora, Illinois, is a provider of Digital Subscriber Line (“DSL”) technology,
which allows high-speed data to be transported through local telephone lines. (Compl. §] 13.) On
May 9, 2000, financial analyst Charles Pluckhahn (“Pluckhahn”) of Stephens, Inc., issued a
report, stating “[o]n a conference call with analysts, Westell’s management indicated that its
largest customer of CPE [customer premises equipment] is still unannounced and this new
customer would continue to be its largest during the coming fiscal year.” Although this customer
was “unannounced,” Westell “leaked” to analysts that SBC Communications (“SBC”), was
driving demand for Westell’s DSL equipment. (/d. 14.) Specifically, another analyst, Joseph
Bellace (“Bellace”) of Jefferies & Co., reported on May 16, 2000 that:

Demand for DSL related equipment (about 44% of company revenues) continues

to be very strong, with good visibility extending for the next three months.

Accelerated deployment of DSL service by British Telecom and SBC

Communications (an unannounced customer) are driving this performance.
(Id.) The net effect of these positive reports was that the price of Westell stock received a
temporary bounce to close at $28 a share on May 17, 2000; on June 26, 2000, however, the price
of stock closed at $14.6875 a share. (Id. § 15-16.)

Despite the positive reports, defendants knew by late June 2000 that SBC would be

cutting back its purchases of DSL modems from Westell. Defendants acquired this non-public


board meeting at which plaintiff's demand might be considered, the defendant directors’ interest
in their own alleged wrongdoing would affect their decisions as to whether to sue their co-
directors for the same alleged wrongs.”). Accordingly, defendants’ motion to dismiss for failure
to plead demand futility is denied.
B. Dismissal for failure to plead fraud with particularity

Alternatively, defendants argue that even if plaintiffs’ demand is excused as futile,
plaintiffs’ complaint should be dismissed for failure to plead fraud with specificity in Counts I
and II under Federal Rule of Civil Procedure 9(b). Plaintiffs respond (in a footnote) that they do
not need to plead their claims for breach of fiduciary duty under Rule 9(b) (Resp. p. 10 n.5) but
plaintiffs also rely on Jn re Cendant Corp. Derivative Action Litig., in which the court applied the
Rule 9(b) standard. 189 F.R.D. 117, 131 (D.N.J. 1999) (holding the plaintiffs pled fraud with
particularity in their insider trading claim under Delaware law because the plaintiffs alleged the
defendants knew at the time of their stock sales that the company’s earning reports were inflated
by accounting improprieties, which would cause the inflated price of the company’s stock to fall
down),

Although plaintiffs claim they are only alleging that defendants engaged in insider
trading, they also allege that defendants made misrepresentations to the public in order to
artificially inflate Westell’s stock price.® Indeed, plaintiffs’ derivative complaint arises from the

same operative facts as those identified in the class action complaint in Jn re Westell

SPlaintifis make the following allegations: Westell disseminated false and misleading information (Compl. {
4) and kept the public “in the dark about the nature and extent of the SBC problem” (/d. { 19), and defendants
engaged in “a massive hype campaign . . . to inflate the price of the Company’s stock[.]” (/d. { 16.)

14


was a declarant or otherwise involved in making false or misleading statements. Nevertheless,
Delaware law provides a separate claim of breach of fiduciary duty based on insider trading. See
In re Cendant Corp. Derivative Action Litig., 189 F.R.D. at 131 (D.N.J. 1999); accord Oberly v.
Kirby, 592 A.2d 445, 463 (Del. 1991) (“It is an act of disloyalty for a fiduciary to profit
personally from the use of information secured in a confidential relationship, even if such a profit
or advantage is not gained at the expense of the fiduciary[,]” citing Brophy v. Cities Serv. Co.,
70 A.2d 5, 7 (Del. Ch. 1949)). Thus, for the same reasons plaintiffs adequately pled demand
futility, the claim for insider trading will remain against each defendant. Accordingly,
defendants’ motion to dismiss for failure to plead fraud with particularity is granted in part and
denied in part with respect to Counts J and II.

Cc. Dismissal for failure to plead a legally cognizable theory of damages under Count II

Defendants next move to dismiss Count Il, asserting plaintiffs fail to plead a legally
cognizable theory of damages. Specifically, defendants argue that plaintiffs’ claims for damages
based on Westell’s potential exposure in defending class actions including significant legal
liability and costs is premature and damages based on harm to Westell’s integrity in the market
and goodwill is conclusional.

With respect to plaintiffs’ claim for damages based on Westell’s exposure to defending
class actions, plaintiffs cannot bring a derivative action to recover expenses from a pending
securities action involving Westell until the case has proceeded to final judgment or settlement.
Inre United Telecomm, Inc. Sec. Litig., No. 90-2251-EEO, 1993 WL 100202, at *3 (D. Kan.
Mar. 4, 1993); of: In re Symbol Tech. Sec. Litig., 762 F. Supp. 510, 516-17 (E.D.N.Y. 1991)

(holding that the derivative plaintiff could not seek litigation expenses associated with a

16


a

behalf of the corporation would be futile, (2) that allegations of fraud underlying the claims in
Counts I and II are not pled with particularity as required by Federal Rule of Civil Procedure
9(b), and (3) that Count II fails to plead a legally cognizable theory of damages. For the reasons
articulated below, the court grants in part and denies in part defendants’ motion to dismiss.
MOTION TO DISMISS STANDARDS

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the
sufficiency of the complaint for failure to state a claim upon which relief may be granted. Gen.
Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7" Cir. 1997). Dismissal is
appropriate only if it appears beyond a doubt that the plaintiff can prove no set of facts in support
of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957);
Kennedy v. Nat'l Juvenile Det. Ass’n, 187 F.3d 690, 695 (7" Cir. 1999). In ruling on the motion,
the court accepts as true all well pleaded facts alleged in the complaint, and it draws all
reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp.,
176 F.3d 971, 977 (7" Cir. 1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7 Cir. 1996).

In addition to the mandates of Rule 12(b)(6), Federal Rule of Civil Procedure 9(b)
requires “all averments of fraud” to be “stated with particularity,” although “[mlalice, intent,
knowledge, and other condition of mind of a person may be averred generally.” “The rule
requires the plaintiff to state the identity of the person who made the misrepresentation, the time,
place, and content of the misrepresentation, and the method by which the misrepresentation was
communicated to the plaintiff.” Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d. 771, 777
(7" Cir. 1994); see also DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7" Cir. 1990) (“Although

states of mind may be pleaded generally [under Rule 9(b)], the ‘circumstances’ must be pleaded


UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

JEFFREY DOLLENS and JEFF VUKOVICH,
derivatively on behalf of
WESTELL TECHNOLOGIES, INC.,

)
)
)
)
Plaintiffs, )
)
vs. ) No. 01 C 2826
) Judge Joan H. Lefkow
MARC ZIONTS, )
J. WILLIAM NELSON, )
HOWARD L. KIRBY, JR., )
THOMAS A. REYNOLDS, III, ) DOCKETED
ROBERT C. PENNY, IL )
and MELVIN J. SIMON, ) JUL 2 4 2002
)
Defendants. )

MEMORANDUM OPINION AND ORDER

This case is before the court on the motion of defendants Marc Zionts (“Zionts”),
J. William Nelson (“Nelson”), Howard L. Kirby, Jr. (“Kirby”), Thomas A. Reynolds, II
(“Reynolds”), Robert C. Penny, III (“Penny”) and Melvin J. Simon (“Simon”),' who are or were
officers or directors of Westell Technologies, Inc. (“Westell”), to dismiss the consolidated
complaint brought by two individual shareholders, Jeffrey Dollens (“Dollens”) and Jeff
Vukovich (“Vukovich”), derivatively on behalf of Westell. In their motion to dismiss,
defendants contend (1) that the complaint fails to adequately plead a prerequisite to suit, namely,

that a demand by plaintiffs on Westell’s board of directors to take action against defendants on

‘Defendants currently hold or held the following positions at Westell: Zionts was Chief Executive Officer
(“CEO”) from December 1997 until March 1, 2001 and a director from January 2000 until March 1, 2001; Nelson
was President and Chief Operating Officer from December 1997 until March 1, 2001 when he became CEO
succeeding Zionts and a director since January 2000; Kirby has been a director since March 2000; Reynolds has
been a director since January 2000; Penny has been a director since 1998; and Simon has been the Assistant
Secretary and Assistant Treasurer and a director since 1992.


disinterested status of the directors was lost because two of the director defendants sold company
stock when they were in possession of material non-public adverse information and another
director received substantial annual contract payments through the board.

In Jn re Cooper Companies, Inc. Shareholders Derivative Litig., 2000 WL 1664167, at
*6-7, the court held that the plaintiffs properly pled demand futility because three directors
including the co-chairman profited from and/or participated in a fraud scheme to profit from the
purchase and sale of bonds based on inside information. Further, it concluded that two directors
lacked independence because they were corporate inferiors to the co-chairman and absented
themselves from an emergency board meeting.

After a review of these cases, the court concludes that plaintiffs’ allegations do create a
reasonable doubt that a majority of Westell’s board of eight directors could have exercised
disinterested and independent business judgment in responding to a shareholder demand.
Defendants attempt to distinguish Jn re Oxford Health Plans, Inc. and In re Cooper Companies,
Inc. Shareholders Derivative Litig. by arguing that the plaintiffs in those cases pled more
particularized facts. Plaintiffs’ allegations here, however, are similar to the facts pled in those
cases because, although plaintiffs do not specify the exact manner in which defendants knew
SBC would order fewer modems from Westell (Compl ff] 10, 12), plaintiffs allege the director
defendants learned about this non-public information by late June 2000 and sold their Westell
stock when the price was artificially inflated by Westell’s “blockbuster announcement” that it
won SBC as a customer. Further, right after the director defendants sold their stock, the negative
news of SBC’s cutbacks became public and Westell stock declined from a high of $30 a share to

the mid-to-high teens.

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Technologies, Inc. Sec. Litig., No. 00 C 6735 (see Mem. Op. and Order, Oct. 26, 2001 at p. 20).”
Therefore, the court will apply Rule 9(b). See Jn re Gen. Instrument Corp. Sec. Litig., No. 96 C
1129, 1997 WL 610452, at *10 (ND. Ill. Sept. 24, 1997).

In the class action, the plaintiff alleged that defendants Zionts, Nelson, Kirby, Reynolds
and other defendants not named in the instant derivative action violated the Securities Act of
1934 by knowingly and/or recklessly making false and misleading statements to the class
plaintiffs through press releases and conversations with analysts. Further, the plaintiff alleged
that some of these defendants personally profited from these misrepresentations by selling their
personal holdings to the class plaintiffs after artificially inflating the price of Westell stock. On
defendants’ motion to dismiss, the court found it could be reasonably inferred from the plaintiff's
class complaint that Westell’s spokesperson made the allegedly false and misleading statements
as authorized by Zionts and other Westell top management. However, the court dismissed
Nelson, Kirby and Reynolds as defendants because there was no basis to infer from the class
complaint that any of them was a declarant or otherwise involved in making false or misleading
statements even though it found the plaintiff alleged a strong inference of scienter based on
insider trading as to Nelson, Kirby and Reynolds as well as Zionts.

For these same reasons, all of the defendants except for Zionts must be dismissed with
respect to any claims of breach of fiduciary duty based on alleged misrepresentations they made

to the public since there is no basis to infer from plaintiffs’ derivative complaint that any of them

7Whether plaintiffs meet the Rule 9(b) standard involves another argument raised by defendants in their
motion to dismiss, which is that Nelson, Kirby, Reynolds, Penny and Simon be dismissed for the same reasons the
court dismissed Nelson, Kirby and Reynolds as defendants in the Jn re Westell Technologies, Inc. Sec. Litigation,
No. 00 C 6735. Therefore, the court addresses that argument here as well.

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